Factory rebound caps gains from U.K. to Japan

Published 8:07 pm, Monday, July 1, 2013

American manufacturing rebounded in June as orders picked up, while factory reports from Japan to the U.K. pointed to stabilization in the global economy.

The Institute for Supply Management's U.S. manufacturing index climbed to a three-month high of 50.9 from 49 in May, the Tempe, Ariz.-based group said Monday. A reading of 50 is the dividing line between expansion and contraction.

Shares in the world's biggest economies rose as the data bolstered optimism for a pickup in global growth in the second half of the year. At the same time, a decline in China's purchasing manager's index showed a credit squeeze in the world's second-largest economy poses a risk to the outlook.

"The pace of activity at the global level is moderate and stable," said David Hensley, director of global economic coordination at JPMorgan Chase in New York. "We are not at a point yet where we are seeing a significant pickup in the growth rate. Our outlook is for growth to pick up a bit, though not extraordinarily so."

Big Japanese manufacturers turned optimistic for the first time since September 2011, indicating confidence in Prime Minister Shinzo Abe's reflationary policies even after stock market volatility.

The quarterly Tankan index for large manufacturers rose to 4 in June from minus 8 in March, the Bank of Japan said in Tokyo Monday. A positive figure means optimists outnumber pessimists.

U.K. manufacturing grew at the fastest pace in two years, adding to signs that the recovery is gaining traction. A factory gauge rose to 52.5 in June from 51.5 in May, Markit Economics and the Chartered Institute of Purchasing and Supply said in London.

Euro area

In the euro area, manufacturing contracted less than initially estimated last month, adding to signs the currency bloc's economy is beginning to emerge from a record-long recession.

At the same time, efforts to rein in financial speculation and real-estate prices are holding back China's economy. Two gauges of Chinese manufacturing fell in June. An official Purchasing Managers' Index dropped to 50.1, the lowest level in four months, from 50.8, the National Bureau of Statistics and China Federation of Logistics and Purchasing said Monday in Beijing. A private PMI from HSBC Holdings and Markit Economics was 48.2, the weakest since September.

Construction gains in the U.S. and in other parts of the world are giving a boost to companies such as Caterpillar, the world's largest maker of construction and mining equipment.

`Getting better'

"We have a construction business that's getting better," Michael DeWalt, director of investor relations for Peoria, Ill.-based Caterpillar, said at a June 5 conference. "If you look at the three biggest end markets -- U.S., Europe in general and China, with the exception of Europe, I think they're getting better but they have a lot of room to grow."

Construction spending in the U.S. climbed 0.5 percent in May, led by the strongest expenditures on residential projects in more than four years, Commerce Department figures showed. Outlays on housing climbed to the highest level since October 2008.

"A number of the positive things occurring in the U.S. are domestically oriented," such as the boom in shale gas exploration and a recovery in housing, said Drew Matus, deputy U.S. chief economist at UBS Securities in Stamford. "Even if the rest of the world has issues, we have our own little renaissance going on."

Economists' forecasts

The median forecast of 85 economists surveyed by Bloomberg called for the ISM measure to rise to 50.5. Economists' estimates ranged from 49 to 52. The report showed 12 of the 18 manufacturing sectors reported growth in June, led by makers of furniture.

The production gauge rose to 53.4 last month from 48.6 in May. A measure of new orders increased to 51.9 from 48.8, and the gauge of export demand advanced to 54.5 from 51 the month prior.

"The increase in new orders is a positive for production," said Daniel Silver, an economist at JPMorgan Chase in New York. JPMorgan was the top-ranked forecaster of the ISM index in the past two years, according to data compiled by Bloomberg. "We'll still see growth in manufacturing but much more modest growth than the first quarter."

Factory employment

Still, the group's measure of factory employment dropped to 48.7, the lowest since September 2009, from 50.1.

Now Playing:

"As new orders and production continue to move forward, we hope to see employment come back into positive territory," Bradley Holcomb, chairman of the group's factory committee, said on a conference call Monday with reporters.

In addition to housing, sustained strength in auto sales is keeping factories busy. Vehicle purchases increased to a 15.24 million annual rate in May, the strongest in three months, according to figures from Ward Automotive Group.